Baltimore region still plagued by hidden recession

PHILIP MOELLER ZHC FJB

The hidden recession -- the one not fully seen in statistics but still felt by nearly everyone -- continues to plague the Baltimore region.

If there are silver linings and other glimmers of a healthy economy rebound, they have not turned up in formal assessments or in scores of more casual conversations.

The hidden parts of this recession are not secrets, but simply hard to quantify. They're linked to the well-known decline of the commercial real estate market and of the lenders heavily exposed to real estate losses, namely the banks and S&Ls (and, lately, even some credit unions).

Facing an already slowing economy with an unplanned glut of failed projects dumped on the market, commercial real estate has slid into the worst downturn of most developers' professional lives. No one I've talked to expects much life from this sector before 1995.

Lenders are likewise nursing wounds that will take years to heal. Forced to develop more cautious lending standards, and with few choice projects to fund anyway, bankers have simply had to pull back. Outside of real estate, business plans for new capital spending nationally have continued to fall, and stretched consumers also are trimming their credit sails.

The resulting contraction in the financial services industry has not only spread to insurers and other large holders of financial assets but has accelerated the pace of bank mergers. This may produce healthier financial institutions in a few years, but its short-term efficiencies consist mostly of closing branches and cutting redundant jobs.

This so-called white-collar recession doesn't show up in the unemployment numbers the same way as would a "traditional" manufacturing sector decline. (Of course, we may never see a blue-collar downturn again because there won't be enough blue collars to cause one.)

And this is where the "hidden" part comes in.

Many of the relatively affluent executives, developers, consultants and related contractors hurt by this recession do not show up in the unemployment roles. They still have jobs, but jobs that are producing sharply reduced levels of income and very few economic spin-offs for their traditional clients.

What we're left with is a professional and managerial class that is badly underemployed, earning smaller incomes and creating less wealth for itself, plus creating fewer economic benefits for its traditional clients and customers. It's as if the rubber band that propels so much of the economy had lost its elasticity.

So, the unemployment numbers may not look so bad. And the gross national product report for the third quarter may show an economy that is growing again.

But a few positive numbers will not make a recovery.

The Federal Reserve Board has recognized this basic weakness for many months and has been gingerly pushing down interest rates. It has to be careful here because it doesn't want to create inflationary pressures in the economy. Lower rates are also a mixed blessing for a financial community that needs all the interest income it can muster to help rebuild balance sheets.

Despite the Fed's latest cut in its discount rate last Friday to 5 percent, the lowest figure since 1973, no one is expecting borrowers and lenders to have a credit feeding frenzy any time soon. The cuts will help, but they'll take time.

With the consumer strapped, business spending down and government deficits at all levels, we're left with foreign trade as the great recovery hope. Now, exports have been a bright spot, actually running ahead of imports for the first time in nearly 10 years. But here's economic reality:

Our gross national product in the second quarter totaled $5.6 trillion at an annual rate. Of this, consumer spending took 67.5 percent, government spending 20.5 percent and private investment 11.7 percent. What's left over, a whopping 0.3 percent (actually rounded up from 0.265) came from a net trade surplus of $14.9 billion.

And so we wait, certainly for the rest of this year and, from this chair, through much of next year as well.